November 09, 2008
China Announces 4 Trillion Yuan Economic Stimulus (Update2)
By Li Yanping and Chia-Peck Wong
Nov. 9 (Bloomberg) -- China announced a 4 trillion yuan ($586 billion) stimulus plan to spur expansion in the world's fourth-largest economy, helping sustain global growth as the U.S., Europe and Japan teeter on the brink of recession.
The funds, equivalent to almost a fifth of China's $3.3 trillion gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said today on its Web site. China will adopt a "pro-active fiscal policy" and pursue a "moderately loose" monetary policy, it said.
Apparently, the Chinese leadership is not too sanguine about economic prospects. I reprise Figure 1 from this post, which depicts the growth rate for China's real GDP over the past 14 years.
Figure 1: 4 quarter growth rate in real Chinese GDP, latest vintage (blue) and August 2006 vintage (red). Source: CEIC (older vintage), ADB, and press accounts (newest vintage).
The article continues:
China accounted for 27 percent of global economic growth last year, more than any other nation, the International Monetary Fund said in a report in April this year. Taiwan, which counts China as its largest trading partner, today cut interest rates for the fourth time in two months after exports dropped in October by the most in three years.
"Over the past two months, the global financial crisis has been intensifying daily," the State Council said in today's statement. "In expanding investment, we must be fast and heavy- handed."
The package announced today, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, the State Council said.
The government will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan.
In addition, grain purchase prices and subsidies for farmers will be raised, as will allowances for low-income urban households. The government also scrapped loan quotas to help boost lending to small businesses.
The stimulus plan may boost China's economic growth by 2 percentage points next year, said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. UBS AG and Credit Suisse AG before today's announcement forecast expansion of no more than 7.5 percent for next year, which would be the slowest in nearly two decades.
What this suggests is the Chinese leadership sees a somewhat more pronounced slowdown in growth than the IMF. The IMF's revised outlook released Thursday indicates a 0.1 ppt reduction in 2008 y/y growth, and 0.8 ppt reduction for 2009 y/y growth. These are revisions relative to those released less than a month ago. Current IMF projections (as of Thursday) are for 2008 q4/q4 of 9 ppt, and 2009 q4/q4 of 8.3 ppt.
Posted by Menzie Chinn at November 9, 2008 12:24 PMdigg this | reddit
It will be interesting to see what such a comparatively massive 'stimulus' does for an economy like China's, where the problem is less of the sort seen in the United States, and more of the sort where spillover effects are knocking the shaky underpinnings out from a number of more traditional (and in China's case massive) problems.
Posted by: MM at November 9, 2008 12:44 PM
It is a very big deal though, equivalent to around 7% of GDP for each of the next two years.
Given that exports are worth around 7% of GDP, this is evidently designed to insulate China against a totally unprecedented collapse of world trade.
Posted by: bill j at November 9, 2008 01:14 PM
The Chinese appear to be Keynesians.
Posted by: acerimusdux at November 9, 2008 01:32 PM
the massive 'stimulus' might reduce the expectation of a global deflation phase over the next years. Specifically remind that the last summer inflation scare was driven also by the excessive domestic demand of the emerging markets. So primary goods might become again a commodity.
Maybe next week Chinese retail sales would turn out to be below expectations, that's way the Government is already proactive.
Posted by: ishi at November 9, 2008 01:41 PM
It does make it a lot easier for the Chinese that, in contrast with the US, they do not have to borrow from abroad in order to finance their deficit spending.
Posted by: Barkley Rosser at November 9, 2008 02:44 PM
I was quite confused at the differences between the Chinese and American bail out plans. How come the Chinese are spending an awful lot on infrastructure whereas the US is giving banks liquidity that they still refuse to loan out? Why doesn't the US also take on huge govt spending initiatives that will pump money into the economy? If the US did that and at the same time eased the credit crisis by giving funds to banks mandating that they lend then shouldn't things be allright?
Posted by: qayam at November 9, 2008 04:55 PM
If, over the next couple of years, the Chinese are to spend $586b on "infrastructure" of a variety of types, will they still be able to lend the US $2b per day as well?
Posted by: IntoTheBlack at November 9, 2008 05:06 PM
How much of this is spending that was already supposed to occur and has been included in the stimulus to assist in efforts to jawbone confidence levels?
Posted by: benamery21 at November 9, 2008 05:22 PM
Into the Black:
The answer is probably. Roughly half of the $2B per day they lend us is done with freshed 'printed' Yuan.
Posted by: algernon at November 9, 2008 06:35 PM
Could this be an attempt by China to take advantage of the stumbling of the US and Europe. I am sure they would love to be the number one economy in the world, even if it is years away.
Posted by: Tobin at November 9, 2008 07:02 PM
There are some very interesting impressions of how China is going to go about this: "The yen declined for a second day against the euro and the dollar on speculation China's $586 billion stimulus package will give investors confidence to buy higher-yielding assets using money borrowed in Japan."
So, are they planning to partially sterilize the borrowing by swapping Treasuries/Agencies for credit lines in yen, knowing the Japanese will act to weaken the yen? Menzie, what do you think?
Posted by: Charles at November 9, 2008 09:05 PM
It is telling that on the US announcement of a huge bailout plan stock markets around the world tanked but on the announcement from China stock markets rallied.
Posted by: DickF at November 10, 2008 07:35 AM
Where do you get the figure for 7% as exports as a share of China's GDP? I believe it's closer to 40%.
Posted by: Dave Schuler at November 10, 2008 11:42 AM
That figure was actually from JP Morgan Asia Pacific Economic Research. Essentially the confusion arises as people compare the total turnover of exports to GDP, measured in value added terms, which are two fundamentally different things.
Essentially when you strip out the imported component of exports and convert the domestic content share into value-added terms by subtracting input purchases from other domestic sectors, you get a much lower figure for the percentage of GDP.
See here for Jonathan Anderson of UBS explanation
This figure is disputed by Brad Setser who thinks Anderson understates the importance of exports in the Chinese economy. But from my reading its a difference of whether its Anderson's 7% or Setser's 10%, not the 40% of the value of exports relative to GDP.
Posted by: bill j at November 10, 2008 02:07 PM
bill_j and Dave Schuler: China Economic Quarterly figures estimate the 2008 export/GDP ratio at 35.7% ( = USD1462/USD4100). 2007 is 38.1% (all figures at market exchange rates, not PPP).
qayam: I think you should look at the costs and benefits of a dollar spent in the context of different economic environments. In the United States, the financial system is essential for (hopefully) mediating resources from savers to those who want to invest, and so repair of that system is essential. In China, a large chunk of the financial system (the banks) did not really operate all that independently of the government, so repair of that system is not as essential to the well functioning of the economy. On the other hand, deficient aggregate demand can be rectified by fiscal stimulus, and to a lesser degree, releasing the administrative controls that earlier constrained lending. So, the different approaches to stimulus make sense.
Charles: Frankly, I read and re-read that paragraph and didn't understand the reasoning in it. So I don't have an answer. I think we'll just have to read the tea leaves over the next few weeks, as more details come out.
Posted by: Menzie Chinn at November 10, 2008 02:08 PM
I agree the financial sector is critical for the economy. But I'm not so sure bailouts for existing lenders is the right answer, as opposed to the new government lending facility proposed by Blinder.
I think stimulus is a better route than wealth maintenance (bailouts) to combat the downturn. The Treasury can't afford wealth maintenance. The losses just have to be recognized, the quicker the better, and then move on. Anyone who thinks the bailouts have not affected Treasury's ability to conduct fiscal stimulus should look at what's happened to the cost to guarantee against a Treasury default.
Posted by: don at November 10, 2008 02:42 PM
You're right of course, I had it at around 35% as well, 40% was the figure quoted by Roubini. The argument around exports actual, far lower, proportion of GDP still stands though.
Posted by: bill j at November 10, 2008 02:58 PM
I think that the gross export/GDP figure is important if the export sector is a major source of employment. And when production in this sector contracts, there may be multiplier effects. In Malaysia, for example, the gross exports/GDP is 100-120% but the ratio of net exports to GDP is 15-16%.
Another qualifier is how well can the manufacturing sector's excess capacity be redeployed for the local market. For China, the the consumer sector is not big enough to absorb the excess capacity arising from a recession in US and Europe.
Posted by: Jeremiah at November 10, 2008 09:12 PM
I am strongly opposed to the US bailout and I believe that the Chinese bailout will be much less efficient and wasteful of capital than if done by business in a market environment but compared to the US bailout China is on the road to an economic boom.
The bottom line on the US bailout is that capital is being poured into failing businesses and will result in near total waste. Any incentives for capital improvement are insignificant.
On the other hand, the China bailout is nearly totally focused on investment in new capital and capital improvements. There are tax incentives for businesses to make capital investments and the largest expense will be infrastructure, road and bridge expansion and improvements at the top of the list. The Chinese are investing in capital while the US is investing in failure.
The Chinese are proving themselves to be much better economists than any of the US economic policy makers.
Posted by: DickF at November 11, 2008 05:08 AM
Amen, Dick F
Posted by: algernon at November 11, 2008 02:37 PM
Although I have never been a fan of government-fueled stimuli, the relative wisdom of the plan hinges on the source of funds the Chinese government decides to utilize. Their best choice would be the country's nearly $2 trillion in foreign reserves, the largest portion of which is held in U.S. Treasury and agency debt. This pile of dollars, which really amounts to no more than a subsidy for U.S. consumers, does nothing to benefit Chinese citizens.
If it does decide to employ this ocean of cash, China will become a net seller of U.S Treasuries just as the U.S. Government itself will be pushing up its issuance of new Treasury bonds into record territory. With two huge sellers and few major buyers (just about every major creditor nation having problems of their own), the Federal Reserve will become the only reliable customer.
Posted by: Anonymous at November 12, 2008 03:53 PM